Sixth Circuit Analyzes Standards for Sanctions for Failing to Preserve Evidence

by Butler Snow LLP
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In Automated Solutions Corp. v. Paragon Data Systems, 2014 U.S. App. LEXIS 11918 (6th Cir. June 25, 2014), the United States Court of Appeals for the Sixth Circuit provided a close examination of the standards required for the imposition of severe sanctions for failing to preserve evidence.  The case involved a dispute between two software companies over the development of software code.  Essentially, the plaintiff Automated Solutions (“Automated”) accused Paragon Data Systems (“Paragon”) of utilizing Automated’s code to develop a competing software program.   Automated filed a motion for sanctions seeking a default judgment against Paragon for Paragon’s failure to preserve a server and two hard drives utilized in the development of the competing software as well as computer backup tapes.  The district court concluded that Paragon was negligent in failing to preserve the materials, but that there was no evidence indicating that Paragon acted with any willful or malicious behavior.  Instead of imposing sanctions, the court indicated that it would consider the issuance of an adverse inference instruction against Paragon at trial.  After Paragon prevailed on summary judgment, Automated appealed to the Sixth Circuit.

On appeal Automated urged the Sixth Circuit to enter judgment in Automated’s favor as a result of Paragon’s failure to preserve evidence.   The Sixth Circuit rejected Automated’s arguments primarily on the grounds that it failed to show that the destroyed evidence was relevant.  The Court explained that “the party seeking an adverse inference must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed [or unavailable] evidence would have been of the nature alleged by the party affected by its destruction.”  Id. at *17, (quoting One Beacon Ins. Co. v. Broad. Dev. Group, Inc., 147 F. App’x 535, 541 (6th Cir. 2005)).  Automated failed to present evidence that the destroyed materials were utilized in the development of the software, so the Court refused to overturn the district court’s conclusion that a reasonable trier of fact would not find that the missing server and hard drives would support Automated’s claims.  The Court also upheld the district court’s conclusion that, under Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003), the litigation hold did not need to extend to backup tapes used only for disaster recovery.

Although critical of Paragon for its failure to preserve the hard drives and external server—particularly since Paragon was a technology company—the Court declined to impose sanctions and upheld the district court.  In doing so the Court reiterated that it previously declined to impose “bright-line rules” for sanctions, “leaving it instead to a case-by-case determination whether sanctions are necessary and, if so, what form they must take.”  Id. at *26 (citing Flagg v. City of Detroit, 715 F.3d 165, 178 (6th Cir. 2013)).   The case is therefore an important reminder that a court’s inquiries regarding sanctions will be case specific and not subject to a de novo, fact-based analysis on appeal.  Instead, the Sixth Circuit looks to whether the district court committed a clear error in judgment in imposing (or not imposing) sanctions, leaving potentially little room for reversing findings of sanctions.  This underscores the importance of creating a detailed factual record at the district court level with respect to sanctions motions, and of course is yet another reminder of the necessity of painstakingly preserving potentially relevant evidence.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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